MSE News: Over-55s get green light to use their pension like a bank account

jem16

SnowMan wrote: »

Phased drawdown gets you back to the same position as UFPLS. That is, in the example, if you put £10,000 into drawdown take the 25% tax free cash and immediately take the 75% balance, with the balance of £30,000 uncrystallised to be put into drawdown later.

However if you are going to do this you might as well go for UFPLS, as that is essentially what this phased drawdown achieves?

Which is really why there is nothing new about the proposals other than the ability to take the whole pot.

SnowMan

jem16 wrote: »

Which is really why there is nothing new about the proposals other than the ability to take the whole pot.

I guess the important thing about UFPLS is that it is more likely to be available through individual products than drawdown and probably cost less (?)

All the provider has to do under UFPLS (sort of) is to pay the lump sum.

There may be scenarios where drawdown is more tax efficient than UFPLS, but where the provider only offers UFPLS. Then it will be a case of weighing up the costs of transferring to an arrangement that offers drawdown against the tax benefit.

jamesd

SnowMan wrote: »

Phased drawdown gets you back to the same position as UFPLS. That is, in the example, if you put £10,000 into drawdown take the 25% tax free cash and immediately take the 75% balance, with the balance of £30,000 uncrystallised to be put into drawdown later.

However if you are going to do this you might as well go for UFPLS, as that is essentially what this phased drawdown achieves?

Somewhat similar to phased drawdown alright.

Plain drawdown can perhaps do better than either. Say you take the tax free lump sum and invest it within a S&S ISA to produce income. That then reduces the amount of ongoing taxable income that you need to take from the drawdown pension.

If you use the UFPLS you're effectively wasting some of the potential of the tax free lump sum by leaving much of it in the pension pot.

UFPLS isn't really set up to produce that ongoing [STRIKE]taxable[/STRIKE] tax free income, it's more assuming that it's to be taken and spent. The tax free portion could go into the ISA. Just at a lower rate than taking the lump sum early on. For someone who cares about not paying higher rate income tax the UFPLS can't get to the annual ISA limit, while drawdown can.

soperman

In addition to the new flexibility of withdrawing income, the removal of the 55% tax charge on crystallised funds also brings Drawdown plans into the mix for IHT planning. This will be particularly so for areas in the UK with high cost housing where the IHT threshold is easily exceeded.

I have constructed an at-a-glance table comparing the tax treatment of death benefits of an annuity, drawdown plan and he following link takes you to my blog where the table can be viewed:
https://www.retireeasy.co.uk/news/article/pension-annuity-and-drawdown-plans


I hope this helps.

kidmugsy

If I wanted to know about IHT planning I might just ask a socialist.

http://www.dailymail.co.uk/news/article-2808916/Did-Tony-Benn-help-children-avoid-tax-5million-PS-left-Labour-party.html

zagfles

SnowMan wrote: »

It is an interesting point you make.

All other things being equal, it is more tax advantageous to take money out of the pension (noting it is really important to put it in the pension in the first place) and invest it outside a pension, for example through an ISA than leave it in the pension and take it out later.

Of course you have to take the money out of the pension in such of a way that you fully utilise your personal allowance, and avoid un-necessarily paying higher tax. But if you are doing this you are by definition (indirectly) paying at least basic rate tax on the returns by leaving money in the pension, that you could have taken out and put in an ISA.

So accelerating when you get the money out, which is achieved through plain drawdown (because you get the 25% tax free cash upfront rather than in instalments) looks to be better (in most cases) than phased drawdown or UFPLS.

Of course if all the money can be extracted from the pension within someone's personal allowance (which may apply if someone is funding their retirement through alternate provision or has a significant final salary pension paying out in the future, but has an early retirement gap where income is below the personal allowance) then it may not matter too much whether UFPLS or phased drawdown or plain drawdown is used.

Not sure I understand what you're saying, but assuming that the personal allowance is fully utilised, and you avoid HRT, then it makes no difference whether you leave the money in the pension or extract it and put it in an ISA, all other things being equal.

And that applies whether you just take the TFLS and put in the ISA, leaving the rest in the pension, take UFPLS, or used phased drawdown.

Run some examples in a spreadsheet if you don't believe me!

SnowMan

zagfles wrote: »

but assuming that the personal allowance is fully utilised, and you avoid HRT, then it makes no difference whether you leave the money in the pension or extract it and put it in an ISA, all other things being equal.

And that applies whether you just take the TFLS and put in the ISA, leaving the rest in the pension, take UFPLS, or used phased drawdown.

Yes, you are right of course. I've deleted my earlier post.

jamesd

zagfles wrote: »

assuming that the personal allowance is fully utilised, and you avoid HRT, then it makes no difference whether you leave the money in the pension or extract it and put it in an ISA

Yes, those are the cases where taking the lump sum first can reduce overall taxation. If it's all at basic rate anyway there won't be a difference.

N1AK

zagfles wrote: »

Not sure I understand what you're saying, but assuming that the personal allowance is fully utilised, and you avoid HRT, then it makes no difference whether you leave the money in the pension or extract it and put it in an ISA, all other things being equal.

I might be missing something but wouldn't the exclusion from interest/capital gains within the ISA be better than having to pay tax when removing the earned interest from the pension?

So for example, if you could take an extra £20k a year out of the pension at the standard tax rate after 5 years you'd have £100k in the ISA. The interest on the ISA is now yours with no tax. However if the money was still in the pension you would have to pay tax on the capital and tax on the interest when you took them out of the pension?

Chickereeeee

Nope, because:

Lump_sum*Tax_%*Growth_% = Lump_sum*Growth_%*Tax_%

If tax rate and investment performance are the same, so is the the result